Litigation and Arbitration: the top things you need to know - December 2013/January 2014

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Substantive law

1. Penalty can include loss of right to future payment and requirement to transfer shares at an undervalue

The traditional approach to determining whether a provision is a penalty is to distinguish between a liquidated damages clause, which is enforceable if it is a genuine pre-estimate of loss, and a penalty, which is not (Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79. A more modern test is whether the predominant function of the provision is to compensate the innocent party for breach, which is enforceable, or to deter a party from breaching the contract, which is unenforceable as a penalty (Lordsvale Finance plc v Bank of Zambia [1996] QB 752). The courts have also recognised that there are clauses which do not fall into either category and yet may not breach the rule against penalties because they are otherwise commercially justifiable (Cine Bes Filmcilik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669).

The claimant in El Makdessi v Cavendish Square Holdings BV and another [2013] EWCA Civ 1539 was the majority shareholder in a company. He entered into a share purchase agreement (SPA) under which the defendant acquired a significant percentage of his shares. The SPA contained restrictive covenants preventing the claimant from competing with the company. Two clauses in the SPA (the "clauses") set out the consequences if the claimant breached the restrictive covenants: (1) he lost the right to the final two instalments of consideration for the shares; and (2) he would be required to sell his remaining shares to the defendant at an undervalue.

The High Court held that, although the clauses were capable of being penalties, they did not actually breach the rule against penalties because they were commercially justifiable. The Court of Appeal held that the clauses were not commercially justified and were therefore unenforceable. Particularly relevant were the facts that: (1) the clauses (which would lead to the claimant forfeiting tens of millions of pounds) would be triggered on any breach of the restrictive covenants, regardless of how serious the breach was; and (2) the range of activities which might amount to a breach of the covenants was very broad, and many of these would not attract compensation anywhere near the value of what the claimant would forfeit or lose. This led to the conclusion that the clauses were extravagant and unconscionable, and that they went "way beyond compensation and into the territory of deterrence".

The judgment is here. Hannah Brown's article setting out drafting tips in light of the decision is on the Olswang website here.

2. Interim injunctions: when are damages an "adequate remedy"?

American Cyanamid Co v Ethicon Ltd [1975] UKHL 1 sets out the main principles on which the court should exercise its discretion whether to grant an interim injunction. One of the principles the court has to consider is whether damages will be an "adequate remedy", i.e. whether the claimant can adequately be compensated by an award of damages for the loss he will suffer as a result of the defendant continuing the behaviour the injunction is seeking to restrain between the time of the application and trial. If the claimant can be so compensated, no interim injunction will normally be granted.

In AB v CD [2014] EWHC 1 (QB), the High Court considered this principle in the situation where there was a contractual restriction on recoverable damages. The parties had entered into a licensing agreement, clause 11.4 of which limited the damages recoverable on breach of contract by excluding various heads of loss. The claimant applied for an injunction to restrain the defendant from terminating the agreement pending the outcome of an arbitration it had commenced. It was accepted that, if the defendant terminated, the claimant would have no ongoing business. The judge had to determine the effect of clause 11.4 on whether an award of damages would be an adequate remedy for the claimant.

He noted that it was unclear what the expression "adequate remedy" meant as it was used in American Cyanamid. Did it mean (1) a remedy which provided (so far as money could) full compensation for what had been lost; or (2) a remedy that was regarded as adequate by the law even if it might fall short of providing full compensation? The authorities appeared to conflict on which was the correct interpretation. In Bath and North East Somerset DC v Mowlem plc [2004] EWCA Civ 115, the parties agreed in the contract that the claimant's losses would be fully compensated, and the court held it was entitled, when deciding whether to grant an injunction, to take into account whether full compensation could be achieved by an award of damages. By contrast, in Vertex Data Science Ltd v Powergen Retail Ltd [2006] EWHC 1340 (Comm) and Ericsson AB v Eads Defence and Security Systems Ltd [2009] EWHC 2598 (TCC), the parties agreed in the contract that certain heads of damage would not be compensated for at all, and in both cases the court found that damages could be an adequate remedy because it was not unjust to confine a party to certain recoverable damages if it had entered freely into a contract to that effect.

The judge refused to grant the injunction. He applied the approach taken in Vertex and Ericsson, holding that the parties' commercial expectations were set by the package of rights and obligations that made up the agreement, including clause 11.4. If clause 11.4 limited the claimant's recovery on termination, that was part of the deal it had signed up to. The fact that the claimant would not recover full compensation did not make damages an inadequate remedy, and so an injunction would not be granted.

This decision helpfully draws a distinction between the two lines of case law on when damages might be an adequate remedy where there is a contractual restriction on recoverable damages, suggesting that it comes down to the parties' intentions as to compensation as embodied in the contract. That said, the judge expressed "a degree of unease at the result" in a postscript to the judgment and has given leave to appeal. The judgment is here.

Procedure

3. Courts upholding robust approach to relief from sanctions following Mitchell

The courts in general seem to be upholding the robust approach to relief from sanctions espoused by the Court of Appeal in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537 (reported in the November 2013 "Top Things" update). In particular, in Durrant v Avon & Somerset Constabulary [2013] EWCA Civ 1624, the Court of Appeal emphasised that the message inMitchellis not to be undermined and that decisions which do not follow the robust approach taken in that case should not be allowed to stand. The court also confirmed that it could decide applications for relief from sanctions under Rule 3.9 itself, rather than remitting them to a first instance judge.

The Court of Appeal was critical of the judge's approach in this case, particularly in referring to the checklist of matters to consider on an application for relief from sanctions found in the "old" (i.e. pre-1 April 2013) version of Rule 3.9. It was stated in Mitchell that the two considerations in the new version of the rule (for litigation to be conducted efficiently and at proportionate cost, and to enforce compliance with rules, practice directions and orders) were now of paramount importance and to be given great weight. Although the rule required the court to consider "all the circumstances of the case" (which could include some or all of the factors listed in the old checklist), these should be given less weight than the two specific considerations. PLC suggest it may therefore be safest to avoid referring to the checklist in the old version of Rule 3.9 when applying for relief from sanctions.

The court also reiterated the importance of making a prompt application for relief, even in cases of "trivial" non-compliance. Here, nothing had been done about the non-compliance for over two months, which was "far from" prompt, and this was no doubt a factor in the decision to refuse relief where two witness statements had been served a day late, a breach which might otherwise have been regarded as trivial. The judgment is here.

Some of the recent applications for relief from sanctions have had rather unexpected outcomes, for example: (1) where relief has not been granted in respect of breaches that would seem to be "trivial" (see Long v Value Properties and another (unreported, 13/01/14)); and (2) where the court has granted an extension of time for compliance despite the original deadline for compliance having long since passed (see John Holt & Co (Liverpool) Ltd and another v Caterpillar (Ni) Ltd [2013] EWHC 4197 (Comm)). Given the apparent unpredictability of these results, if the other side applies for relief, you need to ensure the client is well aware of the potential costs consequences of contesting that application.

4. Mitchell costs management decision unlikely to go to Supreme Court

According to a report in the Law Society Gazette (see here), the solicitor acting for Andrew Mitchell MP has indicated that Mr Mitchell is unlikely to appeal the Court of Appeal's decision upholding Master McCloud's ruling that his failure to file his costs budget in time meant that his budget would be limited to court fees alone.

5. Still necessary to file defence in time if you apply for summary judgment

The High Court confirmed in Simmons & Simmons LLP v Charles Hickox [2013] EWHC 2141 (QB)) that a defendant who applies for summary judgment on the claimant's claim must still file a defence in accordance with Part 15 of the CPR. Rule 12.3(3), which provides that the claimant may not obtain a default judgment if the defendant has applied for summary judgment and that application has not been disposed of, does not postpone time for filing a defence - it just protects the defendant from the entry of default judgment against him until the summary judgment application is disposed of.

If you are applying for summary judgment on behalf of a defendant client, ensure you either file the defence by the time limit in Part 15 or obtain an extension of time until after the hearing of the application. If you do not do so, and the application is unsuccessful (or you withdraw it before the hearing), the client is likely to be faced with an unless order or default judgment against him. The judgment is here.

Current awareness

6. Chancery Modernisation Review: final report published

On 17 December 2013, Lord Justice Briggs published the final report in his review of the Chancery Division of the High Court. The report makes over 100 recommendations aimed at modernising the court's practices and procedures, including:

• the provision of a modern IT system permitting the online issue of proceedings, electronic case files and the electronic drawing up of orders;
• increased docketing (where the same judge manages a case from issue until trial);
• mutual co-operation and greater convergence in practice and procedure between the Chancery Division, Commercial Court and Technology and Construction Court ("TCC"); and
• better access for justice for litigants in person, including a dedicated counter service in the Rolls Building, early and bespoke case management and the use of simplified directions orders.

The final report and accompanying press release are here. There are no concrete plans at present for implementation of the proposals, although HM Courts and Tribunals Service is apparently in discussion with software providers about setting up a system which would allow online filing and electronic listing in the Rolls Building. According to the Chancellor, Sir Terence Etherton, if the negotiations are successful, these reforms could be introduced by summer 2015 (see the article here).

7. Substantial increases in court fees proposed

On 3 December 2013, the Ministry of Justice published a consultation on its proposals for the reform of court fees. It proposes substantial increases on the current level of fees in order to achieve full recovery of the cost of the civil courts. This includes introducing "enhanced" fees in certain types of proceedings, which are designed to recover more than the cost of the activities to which they relate. Specific proposals include:

• the abolition of allocation and listing fees and the practice of refunding hearing fees where early notice is given that a hearing is not required;
• the introduction of percentage issue fees in money claims. These would be calculated as 5% of the value (or estimated value) of the claim, subject to a maximum fee of £10,000 (with the possibility of a lower maximum of £5,000 for unspecified sums). The current maximum issue fee is £1,670;
• the possibility of higher fees in commercial money claims (those heard in the Chancery Division, Commercial Court and TCC). These cases are currently subject to a fixed hearing fee of £1,090, regardless of the length of the trial. Two alternatives are proposed: (1) applying the maximum issue fee of £10,000 but introducing a hearing fee of £1,000 per day (or £500 where the hearing is for half a day or less); or (2) applying a higher maximum issue fee of £15,000 or £20,000 but retaining the existing fixed hearing fee.

The consultation closes on 21 January 2014 and the Government anticipates implementing the proposals during spring 2014. The consultation paper is here.

8. Draft Hague Principles on Choice of Law in International Contracts

The Hague Conference on Private International Law has published draft Principles on the Choice of Law in International Contracts, together with a draft commentary. The drafts have yet to be finalised and formally adopted by the Hague Conference, but may eventually develop into a binding international convention. The draft Principles and commentary are here and here.